Years of concern about giant pools of
investment capital that were said to be under-regulated and
under-taxed concluded in Dodd-Frank’s hedge fund regulation
requirements and gave rise to new plans to end capital gains
treatment for the profits of hedge fund managers.

But instead of kneeling down before the
regulators and the tax collectors, some of the largest hedge
funds are avoiding the regulation by shutting themselves off to
outside investors.

First, we had Stanley Druckenmiller, who
shuttered his $12 billion Duquesne Capital
Management hedge fund just a month
after the passage of Dodd-Frank. Druckenmiller cited his
inability to meet his own performance expectations and the
personal toll of working as a fund manager, rather than
Dodd-Frank. But between 30 percent and 40 percent of the funds
assets belonged to Druckenmiller or his associates, and he
continues to manage that money. The fund didn’t shut down so much
as go private—and escape the grasp of regulators.

Carl Icahn followed suit, returning the
capital to his outside investors. But this represented just $1.76
billion of the $7 billion he has under management. Icahn didn’t
shut down—he just shut outside investors and regulators out.

This is just the beginning. Expect to
hear a lot more of this sort of thing over the next few months
and years. As the regulatory and tax burden increase on hedge
funds, many of the most successful managers will opt to “go dark”
by “going private.”

What’s clear is that the attempt to
bring hedge funds out of the darkness is backfiring. Some of the
largest money managers in the world, folks with the power to
break the central banks of ancient nations, are retreating even
further from view. Without outside investors, it will be even
more difficult to track their activities.

Hedge fund regulation has backfired.

There are also tax implications of this
move. If a hedge fund manager is only managing his own capital,
he doesn’t have to worry if Barack Obama wants to end the carried
interest exemption. The capital in his fund is all invested
interest, not carried interest. The billionaires won’t be taxed
like their house cleaners any time soon.

The new regulations and new taxes will
certainly make it harder for the next generation of would-be
Soros or Druckenmillers. Several rungs on the ladder they climbed
to epochal wealth have been broken, even if the ladder hasn’t yet
been kicked down entirely. Someday you may have to marry a Soros,
a Neiderhoffer, or a Druckenmiller if you want to benefit from
the investment prowess of the greatest minds in finance.